Contents
|1 |Introduction |2 |
| | | |
|2 |CRP concept |2 |
| | | |
|3 |Critique of the CRP concept |7 |
| | | |
1 Introduction
For several years, when setting discount rates Damodaran has advocated more consideration of country risk premiums (CRP ) when it comes to assessing com- panies with activities in emerging markets. We have to acknowledge that his ap- proach is enjoying growing support among investment banks and auditing firms. At the same time, it is to be noted that Damodaran’s concept has failed to res- onate sufficiently with the academic community. This is reason enough to perform a systematic analysis and critical discussion of his country risk premium concept. Damodaran’s initial considerations concerning a country risk premium can be found in Damodaran (1999a) and Damodaran (2003), with further essentially unchanged mentions in his more recent publications. In our contribution we will concentrate on the two aforementioned sources.
2 CRP concept
In the following, we intend to give a neutral, that is, non-judgmental description of Damodaran’s country risk premium concept (CRPC). We will also attempt to provide a detailed reconstruction of Damodaran’s thought process which led to this approach.
Risk-return models The cost of capital for risk-return models
References: Damodaran, Aswath (1999a) Estimating equity risk premiums, Working Paper, Stern School of Business, New York University, New York.